Amazon Stock Is Taking a Breather, so You Should Too

Amazon stock is tapped out for now

Amazon.com, Inc. (NASDAQ: AMZN) earned plenty of attention when its stock price topped $2,000 a share in September and October. In just a month, that seemed like a distant memory because Amazon stock sold off and bottomed at $1,500.

Now that bulls gained back some control as AMZN trades at $1,722, should investors venture into the stock?

Amazon.com earned $5.75 in the third quarter, easily beating by a wide margin the $2.66 average consensus. Revenue rose 29.3% year-on-year to $56.57 billion.

At an annualized revenue rate of over $200 billion, the stock’s plunge in October seems illogical. Fundamentally, an online firm growing revenue at this rate should scare investors holding traditional retail.

Amazon.com trounced expectations but heightened fear in markets could hurt Amazon.com stock buying. The online firm’s profitability is are on the light side. The $5.75 in earnings per share, divided by the $1,722 share price equals 1.3% in annualized returns.

But as the Fed raises rates, an investor could easily earn 2% holding just money market funds and taking ZERO risks. Said another way, higher interest rates compete with money invested in stocks in general. And when Amazon. stock trades at a high valuation, its share price will face pressure.

Amazon.com’s AWS Strong Yet Again

Amazon.com reported operating margin for AWS up at 31% for the quarter. It owes the operating margin strength to efficiencies in its data centers. With the Amazon consumer business the biggest AWS customer, the efficiency helps the company’s results overall.

AWS revenue grew at a solid rate of 46% Y/Y but investors should note that on a dollar and percentage basis, growth slowed. Still, the annualized run rate of $26 billion is above the $18 billion from last year’s time.

Amazon.com should expect momentum holding for the AWS unit as enterprise customers renew their services and more clients sign up.

Amazon Prime Price Increase

In early May, Amazon Prime prices increased. Renewal rates and annual sign-up numbers did not weaken following the change. Since then, membership and engagement numbers are solid, due to customers consuming video content, music, and taking advantage of the shipping benefits.

In effect, Amazon is like Costco Wholesale Corporation (NASDAQ: COST), whereby the latter makes a healthy profit margin just on selling memberships. Costco stock traded close to its yearly high at $239.

Risks and Amazon Stock

Sustained growth in Amazon Prime membership signups could falter but that may not happen for a while. So long as it adds content that its customers want, sign-ups will continue.

Shows like Jack Ryan and the Romanoffs are examples of videos that will keep viewers subscribed. Looking ahead, Amazon.com has TV shows like the follow-up season to The Marvelous Mrs. Maisel, which has an 8.7/10 rating on IMDB, that viewers will look forward to.

Adding fresh, new, content does not come without a cost. Netflix, Inc. (NASDAQ: NFLX) took on massive debt just to pay for new content and to drive subscription growth. Amazon will have to make more subscription revenue than the cost of acquiring content. If it does not, investors may eventually grow concerned, especially if Prime membership growth stalls in the future.

Amazon Stock Valuation

Fair model values, though, on finbox.io (click on the link to crunch your own numbers) suggest AMZN stock does not have more upside. If the stock trades at fair value and markets grow risk-averse, investors may want to wait for a dip before adding or starting a position on this high-flying FAANG member stock.

Disclosure: The author does not own shares in any of the companies mentioned.